Collins Dictionary Declares NFTs Word of the Year. But What Exactly Are They? – Motley Fool

• Non-fungible tokens (NFTs) are digital tokens that store ownership information.
• NFTs get used in art, collectibles, gaming, and various other areas.
• The NFT market is booming, but there are still some unanswered questions.

Collins Dictionary picked NFT — short for non-fungible token — as its word of the year for 2021. NFT wasn’t the only crypto-related lingo to make it into the top 10. Metaverse and crypto are both on the list as well.

Unsurprisingly, a couple of pandemic terms — hybrid working and double-vaxxed — are up there as well. And cheugy — referring to something that’s no longer cool — is definitely still cool enough to be in Collins’ top words of 2021.

So, what exactly is an NFT?

Collins describes NFTs as, “A unique digital certificate, registered in a blockchain, that is used to record ownership of an asset such as an artwork or a collectible.”

NFTs come in many different shapes and sizes. They get used for things like digital art, gaming, music, and sports trading cards. The item itself isn’t important. The NFT is the token that contains authorship and ownership information for that item.

An NFT is a certificate that gets stored on the blockchain, so it can’t be tampered with. In some cases, the token will include a clause that gives the original creator a cut each time the item is sold.

Fungible tokens are non-unique assets that are divisible. For example, one dollar bill is worth the same as another dollar bill — and it can be broken down into four quarters. In contrast, a non-fungible token is unique. Imagine if Johnny Depp autographed that dollar bill. Not only would that dollar now be unique, it would also be worth more than a dollar. It would be non-fungible.

By that same logic, a digital image might be shared for free all over the internet. But an NFT is like an autographed version of that image. The act of making an NFT would make it unique and give it value.

What are NFTs used for?

We mentioned a few uses of NFTs above, so let’s look at some of them in more detail.

1. NFTs in art

NFT art selling for millions is what’s really grabbed the headlines. The most expensive piece of digital art so far was Beeple’s “Everydays: The First 5,000 Days,” which was sold by Christie’s at auction for over $69 million.

In theory, it is a way to record the provenance and authenticity of a piece of art. The blockchain record proves ownership and authorship. It can also give digital artists a way to monetize their creations.

2. NFTs as collectibles

The most common form of NFT collectibles is probably sports trading cards. For example, the NBA created a Top Shot collection of video clips from famous game highlights. Fans can collect and trade these NFT clips in much the same way as they would physical cards. Even though that same clip may have been shared millions of times online, an NFT of that clip could be a valuable collectible.

3. NFTs in gaming and the metaverse

Years ago, you might have played a video game to earn points or win certain items/improvements for your character. When you stopped playing that game, the points or items you earned would not have any value.

These days, those same in-game items may be NFTs, and you would actually own them outside the game. And the points you win might be cryptocurrency tokens with a value in the real world. For example, players in Axie Infinity (AXS) breed cute cartoon NFT Axies. They can use them to earn crypto tokens in the game, and also sell them to other players.

In metaverses such as Sandbox (SAND) and Decentraland (MANA), people can buy NFT land or NFT clothing for their avatars.

Haven’t NFTs also received criticism?

Yes. One big criticism is the environmental cost of minting an NFT. The big issue is that many NFTs are stored on the Ethereum (ETH) network, which still uses the energy intensive proof-of-work mining model. It is in the process of an upgrade, which will make it more sustainable. But until that happens, these concerns are very valid.

Another is the lack of regulation and control. There are various questions over how copyright works on the blockchain, and how ownership works on images that have been modified and made into NFTs. Plus, some artists have complained that other people made NFTs of their work without permission, which raises questions about the original idea of proving authenticity.

Bottom line

Right now, NFTs are booming, but cryptocurrency investors should be cautious. If you’re an artist or digital creator, it could be a good way to profit from your work. And, if you’re already an art collector or a passionate gamer, NFTs will likely already be on your radar.

But if you’re considering buying an NFT just because you want to own one in the hope the price might increase, it’s worth doing more research. There are thousands of different NFTs out there, some will gain value and some will not. Ultimately, if you wouldn’t buy art or trading cards in the real world, they may not be a good investment in the digital world either.